August 2009 brought with it the peak in auto sales in the United States. For satellite radio, which relies heavily on the auto sector for subscribers, the news may bring a sigh of relief, but there are many things to consider.

Cash for Clunkers was a driver of sales, and increased foot traffic in dealerships, but the program has ended, and there are many who think sales will return to lower levels when $4,500 incentives are missing. In the first month of the program, 180,000 cars were sold with incentives. This represented about 18% of the sales figure in July (July sales approached 1,000,000). In August, 500,000 more cars sold under the program. This translates to about 40% of the cars sold in August (August sales were 1,260,000). Absent Cash For Clunkers, sales would have been flat, if not worse than 2008.

For satellite radio the news would seem to be bitter sweet. On one hand, there are now more satellite radio equipped cars in the channel than without the program. On the other hand, there is a vehicle shortage, and sites such as Edmunds are predicting terrible sales in September, thereby reversing the boost we saw in sales due to Cash for Clunkers.

Getting more specific, there are short and long term impacts. The boost in sales for July and August will add subscriptions. This will help in the long term. In the short term, the company Subscriber Acquisition Cost (SAC) will increase, and Average Revenue Per User (ARPU) will be impacted to the downside.

SAC will go up because the costs associated with a ramp up in production means that the company must invest into chipsets and pay vehicle installation subsidies. Simply stated, the company is investing money into radios that will translate into subscribers down the road. SAC will take a hit, but the pay-off comes when the trial subscriptions become self paying.

ARPU will take a hit because of the number of vehicles that are in production but not yet sold. Makers such as Chrysler, Ford, BMW, and Mercedes are counted as subscribers at the time of installation. The money for those subscriptions is deferred revenue (a liability) until an actual person buys the car. Durning this period of time (from production until sale) these subscribers are RPU averages. The more $0's you have, the lower the average. Long term, the company will generate subscriptions, but short term, these unsold cars hit the ARPU line in a negative way.

If sites such as Edmunds are correct in that September, and perhaps even October sales, will be bad, then we have not seen the jumpstart that would deliver a balanced flow between supply and demand. Had Cash for Clunkers lasted into September, the perception would be that increased sales would continue. That perception disappeared when the program closure came suddenly a bit over a week ago. Now, the benefit that would have been delivered by three months of stronger sales in a row for the auto sector has evaporated. This news is not lost to satellite radio investors.

The big winners in August were Hyundai, Ford, Toyota and Honda. All of these companies were able to post double digit gains. General Motors and Chrysler posted declines.

Hyundai - The company is near 100% installation, but the structure of the deal carries short term impacts in hopes of long term benefits. Radios are not counted as subscribers unless they elect to keep the service after the trial period. Thus, cars sold in Q3 will not hit subscriber roles until Q4 or Q1. For short term traders, strong sales by Hyundai in Q3 translate into costs.

Ford - Sales rose 17 percent to 176,323 in August. Ford subscribers are counted at production. A strong month for Ford means a boost in subscribers because the company needed to increase production to replace the cars sold. Many of the cars sold however, were already counted as subscribers in Q2 (when they were likely produced). Because much of Fords backlog of inventory are now in consumer hands, these subscriptions RPU. However, increased production will add $0's to the metric as well.

Toyota - This deal is similar to Hyundai, with similar impacts on the metrics.

Honda - Sales of Honda's help the subscriber line this quarter. Subscriptions are counted at the time of sale, and high sales in the quarter will help the subscriber metric.

GM - Similar to Honda in deal structure with similar impact on metrics.

Chrysler - Similar to Ford deal with similar impact on the metrics.

The bottom line is that sales will help the company report positive subscriber, but the long term key is a stable auto channel. Even with a Cash for Clunkers boost in sales the auto sector is still down 27.9 percent for the year to date. This fact is a weight on the equity.

My measure of success for Cash for Clunkers was whether or not it balanced out and stabalized the auto sector and reverses the downward trend. At this point it is pretty safe to say that the program did not meet that criteria. It was a success in getting a backlog of inventory sold, but outside the program sales were still not impressive. It has been argued that the Cash for Clunkers program may have simply encouraged people already planning to buy a new vehicles buy them a month or two earlier. This creates a see-saw effect that is not the health I am seeking in the channel. July and August saw 2,100,000 cars sold with 700,000 being part of the program. That is 33%. The real story will pan out over the next two months.

One challenge auto makers face is getting consumers into dealerships without the government incentives. Chrysler is offering $4,500 on select vehicles, but as yet other auto makers are not being so bold. GM's put sales were up 30 percent from July and were the best for the company this year, but they have not yet matched the offer put on the table by Chrysler.

In conclusion, we will see positive subscribers for Q3 with negative impacts to the SAC and ARPU lines due to the auto channel. Higher SAC costs in Q3 are typical. The company manufactures most of their hardware for retail in Q3, and manufacturing means more costs. Longer term, investors can see the reward of the monies invested by the company this quarter. The key thing to watch for is a stable auto channel.

26 Responses to “August Auto Sales Up – What It Means For Sirius XM”

What amazes me is that a business that relies on new car sales has a trendous boost and it still somehow gets a negative spin by the media.

Tyler – appreciate you breaking it down for us and for explaining the pros and cons, but at the end of the day this was a big boost for Sirius and the equity. GM and Chrysler and all the other OEM’s will continue to give big incentives to compete with eachother and move the cars off their lots and I could give two shits if they give them away for free, because Sirius’ deals with them do not change.

There are still too many car companies and the competition will be healthy and at the end of the day will benefit Sirius with subs.

This company owns the OEM market and the penetration rates are rising every quarter & in addition to the rolling out of the certified pre-owned.

I am as bullish as ever because the OEM rate is still far below the scrap rate and people will continue to buy cars. When people keep losing their homes, cars become more important to them for a sense of identity and to make them feel better.

Subs will show an improvement in the 3rd Q and the 4th Q will also be a very strong showing in subs, but also a big breakthrough on cash flow and earnings.

At some point investors and analysts will have to see the forest through the trees. The breakthrough is happenning as we speak and 4thQ 2009 and 2010 are going to big for this company and stock price.

One thing that really bothers me about your analysis of a strong OEM market. It just seems that we are all looking and hoping for a big ramp up in sales and you bring up the negative impacts. What you say really doesn’t make sense – I mean, sre you saying you would rather have shitty OEM sales vs strong sales all year round ?

Enough is enough with this negative crap – we have to get it from all ends from the ignorant media, the NAB, and all thse other self interest groups and traders with agendas.

When are you going to start mapping out for us how the positives. I mean seriously, the OEM market is stabilizing and will start to grow again and with Sirius sitting at a basically break even operating position as of today, they are well positioned to grow the subs, grow the revenue and also cut costs year over year.

They are improving metrics on deals like the GM one, lowering content costs and getting more revenue out of subs from cros content. Getting in bed with Apple is huge and I’m sure there is more to come from this relationship and otehrs like it.

So we are concerned about the cost of chip sets being put into cars as they ramp up production which I understand. Know if these cars are sold and a decent perctentage of these sets become subs that is the pay off. So there is a lag time to recoup the investment. But as I stand on my soap box I see the radios that are not going to become subs piling up w/ the already existing idle radios in cars sold in the past. Houston I think we have a problem! When is Sirius Xm going to look in their closet and see the Millions upon Millions of idle radios bought and paid (growing by the MILLIONS each year) for and figure a way of utilizing them? This 800 pound gorilla is getting bigger by the day and is sooner or later is going to have to come out of the closet. I can’t believe that some type of program can’t be fromulated in some way, shape or form to put these costly, already paid for radios to work. If I were the CEO of a company and knew every other product I made would be thrown in the garbage, you can bet I would have a “plan B” for those babies. So when we put a cost per radio installed into a newly produced car shouldn’t we double that cost for the one that will not be used? The big question is with the bigger penatration rates with the auto manufactors are we not also digging a money pit to throw dollars into? It seems insane not to try and turn this negative into a positive.

Listen guys, Tyler is correct. I certainly appreciate Tyler’s style of reporting. His analysis is usually non-bias, direct, well researched and well written. Hats of to you Tyler.

I’m a car Salesman. I work for a company, 15 years now, that wishes not to be to be mentioned on blogs. However to answer my friends question on ‘How can Siri turn a negative into a positive.’, well the answer was given some time ago. The plan ‘B’ is to turn all used cars pre-installed Satellite receivers on for a 3 month trail period once the new owner takes possession of the vehicle. That’s it! Keep in mind that their are some people that keep their car just for a year or two before they re-invest in another car. Adding to the increased inventory of new preinstalled Siri receivers on the market. They in turn may decide to keep and renew their subscription. The cycle repeats itself over and over again. Brilliant!

Just as you have those who refuse to cancel their home phone service and wont buy a cell phone, or who will continue to watch regular broadcast television and not invest in Comcast or DirectTv, there will always be someone that will not subscribe to Siri XM service.

One recommendation I might add though would be to offer a better incentive for the salesmen to talk up the product. Salesmen don’t get paid to sell the service. Yet we are the ones that have to turn the service on before the customer leaves. Why not pay use directly since we are the soldiers in the field. Instead the dealership gets paid. Although it is in the best interest of the dealership to activate the receiver, the salesman is the one that call to have it turn on. I talk about the product because I’m a Share Holder and subscriber. If I wasn’t, I wouldn’t offer to turn the service on. Most customer are unaware the trail service comes with there car. May I propose $5 a head?

Expert, I could not agree more. There has to be an incentive, that’s just human nature. Sirius Xm needs to get down to the nitty gritty of how to reach possible consumers. They of course are looking at the big picture which is fine but they are walking over a dollar to pick up a dime. The marketing dept. needs to put themselves in the shoes of the consumer and the people who are on the front lines selling this product. Whenit comes to pre owned cars the chip set is already paid for so give the salesman $5.00 or $10.00 bucks. You spent over a hundred to let it sit idle!

This is your worst column yet. How could you find a negative, when there isn’t any? Unbelievable. Are you Short the stock now?

The CEO keeps raising his guidance. Do you know more than he does?

Comparisons to prior years have no meaning. But what we do know is that in Q4 of 2008, no one was buying anything. The year over year comparison has to be wonderful by default. Negative? I dn’t think so.

SIRI’s goal is to generate new subscribers. The assumptions are all the clunkers turned in had zero SIRI or XM installed. Those new cars leaving the lot had a great deal of them installed. Where is the negative with that?

A lot of the people who were interested in the Clunker program were turned down. They may or may not still want a new car.
Don’t underestimate the car salesman. All they were asking for is traffic. And traffic is that they got. Is that a negative?

I am not short the stock. I disclose my position at the end of each article. I am long the stock.

i am not saying that i am negative the stock, nor that car sales are bad. I am saying that investors need to understand the metrics and how what transpires in the auto channel impacts the equity short and long term.

You say year over year is meaningless. To an extent I agree. Comps should be getting easier, but they are still down. Consistent and stable car sales is what is needed. Do you not agree?

Yes, there were lots of satellite radios installed in the cars that sold. that is wonderful. I agree. I am also well aware that the costs will be up because of new production. The company has to invest in those cars, but the payoff is not immediate. That was all I was pointing out.

Absent the clunkers program, car sales were not all that impressive. That means we are looking at a tough September in car sales.

My analysis for q3 with respect to this was:

1. Subscribers will be positive

2. SAC will be higher

3. ARPU will get impacted

Do you disagree with any of this? How did I “overanalyze”? All of the stars are not yet lined up as yet. that is not my fault. It is what it is.

What happened with the program is a postive thing longer term, but has high costs short term. those are the facts.

Mel raised his guidance with the Q2 numbers. It includes and trumps, SAC and ARPU. You left off the reduction in programing and other overhead. I can understand why, because your numbers are of value when those costs are flat, prior to the merger.
The media said SIRI losses increased in Q2

How can you use Edmunds’s prediction in your column? Your mixing your facts and others fiction. Do they have a track record of making correct predictions? Did they predict C4C would run out of money? C4C was an unusual event.
There were zero trade-ins so dealers had nothing to offset the new car price and other usual games they play.

Are your “2. SAC will be higher” and “3. ARPU will get impacted”
compared to Q2 2009, or Q3 of 2008? Last year we had $4 gas followed by zero credit and no car sales. The consumer wasn’t getting blue book for the SUV’s. This year gas is stable. C4C made consumers get high MPG vehicles. Are they going to stay that way with $2.41 gas? September is usually end of model year sales, so maybe the dealers will be back to normal selling lower MPG auto’s still on the lot or being shipped in from the lots near the docks in LA.

The media didn’t give the stockholders credit in the run up in PPS due to Mel’s guidance. They said it was C4C. You bring doubt to the C4C results, without restoring the guidance.

1. Subscribers will be positive
4. SIRI financials will be better than Q2 and Q3 2008.

You come across as if you are warning us not to be so optimistic because of the facts you outline, as if this is not totally built into the stock price & more.

The fact is that the stock is still 25% of the price it was when merger was approved and about 15% of when it was decided they had intent to merge.

This is stock is severly undervalued for what is coming in the next 3 – 12 months, so while most of the facts you state are true on the surface , you are coming across as if “watch out because the shares might be building in too much expectation” . That is a friggin joke.

You claim not to be a financial advisor, but this is the way you come off alot of the time. We need you to really start to promote the positives because the free radio hacks are desperate and are constantly slandering this company and twisting truths.

Remember, you thought the net sub loss in Q2 was going to be alot worse than it was. Were you surprised at the execution in a quarter where 2 of the major OEM’s were in bankruptcy ?

Now the question is, how far off will you be in the 3rd quarter #’s, subs and bottom line. I think you are a pessimist by nature as much as you think you are just laying down facts. You might want to look at your tone and your headlines a little closer. We need a break with all the lies being spewed and all the illegal activity we have to put up with. Investors are still getting fleeced and we need more articles written to highlight the positives.

Sorry I’m coming down on you so hard, but I just had to say it. You are definately extremely intelligent and articulate and you know Sirius and the facts, but I think you and alot of people are underestimating the underlying strength and business model that is developing here.

We do have our monopoly here and terrestrial radio is going down for the count and they know. In addition, Sirius is aligned now with Apple, Blackberry and others next. It’s just beginning.

I’m honestly thinking we may as well wait for the next quarter run up. buy two weeks ahead of time and enjoy the ride. Shit howdy Batman. What a cluster. Now we wait until 2010. First it’s the merger. Then the Cash Flow Positive. Now it’s 2010. Everyones damn Grandkids will be posting here before this company makes a profit.

There is almost 0 future expectations built into this stock price. We should be at 1.35 at least, where we were 1 year ago right before Mel’s infamous post Labor day investor CC where he laid out the plan and we dropped like a rock.

Hey SCRF!!…
How many years have we been talking about Sirius making a profit? Everyone wants to know when the stock will go up and stay there…
well…

Tyler…good article!!
To get the results needed that pipline has to be steady and stay full.

I wish SiriusXM would activate all the non sub radios that are currently in cars.Play music and load it up with advertisers, take the ad money..when the listener get sick of that they can buy a subscription
imho
vaporgold

Can we agree that the cash for clunkers will, as a whole, be positive for Sirius?
Can we agree sales will dip now that the program has ended due to inventory and lack of $$ from govt?
When we factor in what this year was doing for OEMS, can we agree that overall 2009 sales will have been higher due to cash for clunkers then if this program had NOT been instituted?
Can we agree that Sirius will have reduced their costs this year due to synergies of merger, new programs and products(such as Ipod, used car program, xmas products, refinance) and their projected cash flow based on 9 million cars sold?
Can we agree that any increase in subs with the above cst reductions will show up on bottom line in a positive way(just not maybe quite immediately?)
I just think the company has turned the corner and is slowly headed in right direction–It is positioning itself for rapid growth/profits when the economy fully recovers(which its no were near yet)

Even though Cash for Clunkers had & has it’s problems in administering the program it worked as an infusion to a segment of the economy. Don’t be surprised to see it returned the 1st quarter of next year in a modified form. For the President & Congress (on the dem. side) it’s a win, win & win. One, it’s a green program taking gas guzzlers off the road. Two, it’s a stimulus program that gets people back to work. Three, the goverment (we the tax payers) owns stock in GM & Chrysler and it helps solidify the investment. This adminstration does not want these companies to fail. The modifications will come in new restrictions on how much credit for a Clunker will be doled out and the criteria of both the Clunker & new vehicle purchase will be weighted toward even higher MPG vehicles.

Have all of you beat up investor relations at this company?
Wouldnt think that you are afraid of this gorilla in NYC.
Seems like allot of good ideas going to waste.
Sure would like to hear from the usuals posting daily including boo boo and sirinvestor etc- whether you have spoken to them or written them- and what your take was.
I really really really dont think they read this stuff.
And, if Im right this sure is allot of self flagulation.

Hey all …. haven’t been around much but, as always follow the boards and Tyler’s articles….

Tyler good article containing many truisms: SAC goes up with increased production and ARPU will be impacted by those increased sales and the resultant mix by OEM Contract.

Beyond that I think there is still much to be debated regarding “who” (consumer type) bought the C4C cars. Many think that they will offset future sales but, omit the fact that this was a “Clunker” program. Many who purchase these new cars were probably consumers who owned these cars for many years, conservative in their new car purchases, and not usually parading through dealerships. Others who participated could easily have been part of pent up demand to buy, waiting for the program to be executed…

We know sales were non existent from Jan 09 until C4C, BK of OEM’s, and Credit availability loosened up, so why is everyone thinking these “sales” were future and not just delayed sales? I think that we will find stability in the OEM sales numbers at around 10.5M in ’09 and easily up to 11.5 to 12M in 2010, provide we continue on our way to an improving credit market. As the jobs numbers improve, consumers will spend, and autos are a necessity and an American love affair. Relevant to that is the fact that the lower end, or “economy” models with better gas mileage, such as KIA’s new line, come complete with SAT RAD installed. Hyundai has a similar offering and the competition for sales will be stiff, with SAT RAD winning regardless.

Metrics are important in evaluating the company in the microcosm of their quarter over quarter and year over year comparisons. Understanding how the market impacts those numbers is equally important. Failing to step back and look at the broader macrocosm that this company is operating in and the upward momentum of those metrics is just pure folly and could result in an investor loosing out on this company’s success story in the making……

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